As of this morning, Microsoft officially owns Nokia's handset business. The deal cost Microsoft $7.2 billion (or £4.3 billion, much less than what Redmond paid for Skype back in 2011, or what Google paid for Motorola). In one fell swoop it turns the software company into one of the world's largest hardware companies, not only becoming the primary source of Windows Phone devices (the Lumia brand accounts for around 90 per cent of all Windows Phones sold), but also taking on the hundreds of millions of low-end phones that Nokia currently produces for developing markets.
Curiously, Microsoft's newly minted hardware division will be called Microsoft Mobile – the much-reduced-in-size Nokia will continue to operate in Finland under the same name while it works on R&D and selling mobile network infrastructure hardware. Yes, this means your next mobile phone could be called the Microsoft Mobile Lumia Windows Phone.
This move is almost entirely predicated on Microsoft's belief that it must succeed in the mobile space – both in terms of Windows Phone and Windows 8 tablets – if it wants to retain a modicum of consumer relevance. Microsoft must believe that, by becoming fully vertically integrated, it will finally be the master of its own destiny, allowing it to create the same compelling experiences (and profit margins) as Apple (which very closely marries its software and hardware stacks).
This was undoubtedly the utopian vision that was peddled in the Microsoft boardroom last year before a bid was made – but now, as the acquisition finally closes, the harsh reality will quickly settle in. Nokia sold 250 million handsets last year – only Samsung is larger – but only 30 million of those were from the Windows Phone Lumia line-up. The other 220 million were low-end and low-margin Asha, Android (Nokia X), and feature phones. No one seems to know what the company intends to do with the non-Windows Phone portion of its newly minted Microsoft Mobile division – even during its earnings call yesterday Microsoft didn't offer any clear guidance.
While the acquisition might eventually pay off, I think it'll be a few years (if ever) before Microsoft Mobile is fully integrated with the rest of the behemoth. The capability of producing its own Windows Phones in-house is understandably alluring, but I really don't see an easy way of bridging the gaping chasm between Microsoft and the rest of Microsoft Mobile's interests. Does Microsoft really see itself as a producer of low-margin phones? I know that Windows Phone 8.1 specifically targets developing markets, but is that really Microsoft's plan? To go from high-margin software developer to peddler of low-margin phones?
Don't forget about the similarities between the Microsoft/Nokia and Google/Motorola Mobility acquisitions, too. Google toyed with the idea of becoming a handset maker for almost two years until eventually selling off the division to Lenovo. While $7.2 billion (£4.3 billion) is a large sum of money, it's by no means a bank breaker for a company with around $80 billion (£48 billion) in cash. As Microsoft showed with its $6 billion (£3.6 billion) write-down of its Aquantive acquisition in 2012, it isn't afraid to cut its losses. I wouldn't be hugely surprised if Microsoft dallies around with its new handset division for a year or two before selling it on.
On the other hand, if Microsoft can use Microsoft Mobile to capture the high-end markets in the US, Europe, and Asia with some beautiful flagship phones, and at the same time use Nokia's manufacturing skills to pick up some market share from Android in developing markets, then maybe this acquisition will actually work out. That's a very big maybe though, in my opinion.